The most thoughtful older adults take their time and carefully estimate their retirement expenses well in advance of living out their retirement. This makes perfect sense because, now that you’re not working, you’ll need to make sure your retirement funds can cover those costs without stress. Let’s examine some typical monthly retirement expenses and, more importantly, how having the ideal living arrangement can help to reduce them, whether you’re planning to retire soon or are already retired and want to stretch your money even further.
As you approach retirement, it’s crucial to understand the biggest expenses you’ll likely encounter. This knowledge will empower you to make informed financial decisions and ensure a comfortable and secure retirement lifestyle.
Understanding the Biggest Expenses
Retirement expenses can vary significantly depending on your lifestyle, location, and individual circumstances. However, some expenses consistently rank high among retirees.
1 Housing
Housing, encompassing mortgage or rent payments, property taxes, insurance, maintenance, and repair costs, often claims the largest chunk of a retiree’s budget. On average, retirees spend around $17,472 per year on housing, representing approximately 35% of their annual expenditures.
2 Health Care
Health care costs tend to rise with age, making it a significant expense for retirees. As you age, you’re more likely to experience health issues requiring regular medical attention, medications, and potentially long-term care.
3. Food
Food costs can vary depending on your dietary needs, eating habits, and whether you cook at home or dine out frequently. However, retirees generally spend a considerable portion of their budget on groceries and dining expenses.
4. Transportation
Transportation costs can include car payments, gas, insurance, public transportation fares, and ride-sharing services. Depending on your location and lifestyle, transportation expenses can be a significant factor in your retirement budget.
5. Taxes
Taxes can eat into a significant portion of your retirement income. Understanding your tax liabilities and planning accordingly is crucial for optimizing your financial situation.
6. Travel and Leisure
Many retirees enjoy traveling and engaging in leisure activities during their retirement years. These expenses can range from occasional day trips to extended vacations and hobbies.
7. Utilities
Utility costs, including electricity, water, gas, and garbage collection, can vary depending on your location, home size, and energy consumption habits.
8. Insurance
Insurance premiums, such as health, auto, and homeowner’s insurance, can be a significant expense for retirees. It’s essential to review your insurance needs and coverage options to ensure you have adequate protection without overpaying.
9. Personal Care
Personal care expenses can include haircuts, clothing, and other personal grooming needs. These costs can vary depending on your lifestyle and preferences.
10. Gifts and Donations
Many retirees choose to contribute financially to their children, grandchildren, or charitable organizations. These expenses can vary depending on your personal circumstances and philanthropic inclinations.
Planning for Retirement Expenses
Understanding the biggest expenses you’ll likely encounter in retirement is crucial for planning your financial future. Here are some tips to help you prepare:
- Create a realistic budget: Estimate your expected retirement income and expenses to determine how much you need to save.
- Invest wisely: Diversify your investment portfolio to mitigate risk and maximize potential returns.
- Consider downsizing: Moving to a smaller home can significantly reduce your housing expenses.
- Explore cost-saving options: Look for ways to save on groceries, transportation, utilities, and other expenses.
- Seek professional advice: Consult with a financial advisor to develop a personalized retirement plan.
By understanding the biggest expenses you’ll likely face in retirement, you can make informed financial decisions and plan accordingly. Remember, planning and preparation are key to ensuring a comfortable and secure retirement lifestyle.
Estimating the Average Retirement Expenses in a Year
Even though retired people usually have fewer expenses than they did when they were working—fewer commuting costs, for example, plus disability insurance premiums and other costs associated with working—the simple act of comfortably residing comes with a number of expenses.
In fact, the U.S. Bureau of Labor Statistics states that in 2021, the average retiree household spends around $50,000 a year in living expenses. Interestingly, this compares favorably to the average for all households in the United States, which stood closer to $63,000, but it’s still a substantial figure. Let’s break down the biggest expenses in retirement.
Starting off with one the biggest expenses in retirement. Housing costs accumulate because they take into account not only the mortgage or rent, but also the payment of property taxes, homeowner’s or renter’s insurance premiums, and any costs associated with upkeep or repairs for the home. In addition, you have to pay for utilities since you’ll need heat, electricity, and other costs for things like landscaping, trash collection, and TV, phone, and internet. Put another way, even with a paid-off house, one of your biggest expenses is still housing. So make sure you account for all that in your budget.
Right behind housing is healthcare, and this one is just as important. Major costs include health insurance, paying for medical services and supplies, and filling prescriptions. Because older adults frequently depend on high-quality medical care to stay well into retirement, these costs become crucial. Medicare covers some of these costs, but not all. Your monthly costs will soar if you ever require long-term care, so it’s best to budget for this well in advance.
Those well into retirement tend to see a reduction in the amount they pay for transportation costs. This is especially true for anyone who commuted regularly to work. However, this expense does not go away completely; you will still be responsible for paying for any costs associated with using your own car. This includes car loan or lease payments, gas and insurance, maintenance, and registration fees. Even if don’t have a personal vehicle, public transportation costs will also factor into your estimated retirement expenses. You just wont’ be paying as much as you did to get to work!.
Of course, the other expense associated with transportation is travel, and that could very well increase. The only thing stopping you from taking vacations wherever you choose now that you are retired is making sure you have budgeted for them.
Between making your own meals and dining out, food costs can pile up as well. Considering that you still need to eat even if you’re not working, this is the one expense that might not change significantly in retirement.
Nevertheless, you can decide you want to go out to eat more, perhaps even just for breakfast at your favorite neighborhood diner. Additionally, you’ll have more time to engage in more enjoyable activities, such as watching more movies, visiting the city more frequently for events or museums, engaging in your preferred pastimes, or doing anything else you want to do. Therefore, it’s a good idea to keep aside a section of your budget for entertainment.
Managing Expenses by Moving to a Retirement Community
Calculating your typical monthly retirement expenses is only the first step; controlling those costs is a completely different matter. While there exist numerous strategies to cut costs on an individual basis, relocating to a retirement community is one surefire way to address all of them at once.
To be more precise, relocating to a continuing care retirement community (CCRC) assists you in handling almost all of the expenses you will incur in retirement.
This might sound hard to believe, but it’s quite true. Let’s examine each of the above-mentioned costs and see how being a resident of a CCRC helps manage them.
- Relocating to a retirement community helps you keep housing costs under control because you won’t have to worry about things like property taxes. Furthermore, regular costs for maintenance, landscaping, and repairs are combined into a single monthly payment, which is frequently less expensive than paying these expenses separately, particularly in the event of an emergency like the need for a new roof or water heater.
- One of the best reasons to move into a CCRC is to reduce healthcare costs because these communities can provide long-term care regardless of how it changes over time. Furthermore, the cost of that care won’t fluctuate over the course of your stay with what is commonly referred to as a Type A long-term care contract, minimizing the chance that your medical expenses will rise over time.
- Living in a retirement community reduces transportation expenses because many CCRCs provide support and transportation options. This can include visits to nearby medical facilities as well as malls and other attractions. This can lessen your need for a personal vehicle overall and the costs associated with it. Furthermore, a lot of the things you might want to travel for are available on campus, including a fitness center, a swimming pool, walking trails, woodworking shops, performance centers, and more.
- Living in a retirement community can also reduce your costs for entertainment and food. A vast range of amenities are available at CCRCs, giving you the chance to fully enjoy your retirement. On-campus dining options, on the other hand, assist you in managing your food expenses by giving you affordable substitutes for eating out while maintaining the quality of fine dining.
CFP® Reveals: The 5 BIGGEST Expenses in Retirement
FAQ
What is the largest expense for retirees?
What is the largest spending category in retirement?
What does the average retiree spend?
What are the most expensive expenses in retirement?
Of all of the expenses in retirement, the most expensive is generally housing. While of course exact retirement costs will vary from individual to individual depending on their situation, the average cost of housing even far exceeds costs like health care.
How much money does a retiree spend a year?
1. Housing Housing is most retirees’ largest expense. Out of the $49,952 the average household headed by an adult 65 or older spends each year, $16,668 of that goes toward housing, according to Bureau of Labor Statistics data. Depending on your living situation, this may be a rent or a mortgage payment.
How much do retirees spend on healthcare?
Healthcare—which includes health insurance, medical services, supplies and drugs—ranks third on the “biggest expenses” list for retiree households, who spend an average of $6,833 per year (or $569 per month) versus $5,193 for the average U.S. household. Health insurance makes up the bulk of this cost across all households.